Talk from the Top with Jim Padilla

Events changed Ford's outlook in a hurry

Since emerging as CEO Bill Ford's chief Mr. Fix-it more than a year ago, Padilla has encountered a number of wrenches thrown into the Ford revitalization plan. Rising steel and oil prices, falling SUV sales, turbulent currency rates and dwindling market share in the United States all converged to put a damper on Ford Motor's profit goals.

What happened in the three weeks between confirmation of earnings guidance and earnings warning? Things are tough out there, but what happened in that period?

Since we put together our business plan late last fall, there's been a number of things that have had some pretty serious implications. They include another pretty decent hit in our assumptions on currency and exchange. The (discount rate) went down by a half point. When that happens to you, and when you've got a pension fund as big as ours, the hit is over $300 million. The full effect of the commodity prices started sinking in. Our assumption was that we could make a lot of progress on cost, which we had been doing with quite good regularity. And the assumption was that we came out of the year pretty strong on sales, but January and February were pretty weak.

We knew the first quarter was going to be strong. We blew out the analysts' expectations by double. But when we started looking at the roll-through effect of all those things for the full year and our recognition that our ability to totally offset them was going to be very difficult, what we decided was the best thing to do was to face up to it.

You'll recall that when we came out with that initial indication, we said we were going to be at the low side of the estimate. So we had already taken our estimate of performance, particularly on automotive, down a peg.

Some of your challenges are similar to General Motors, but some are different. In their first quarter, their revenue just fell off the cliff. How is your revenue outlook for the year?

We took our second-quarter volume down appropriately, particularly in SUVs. That was a wise thing to do, especially since we're coming out with a new Explorer and Mountaineer. We didn't want to have a backlog of them in inventory. That will have some implications in the second-quarter revenue.

In some cases, we're faced with similar issues. Let's be very candid: Since we put together our revitalization plan in late 2001, at that point in time, we assumed the money against the market would be something like 13.5 to 14 percent. When you look at it today, Ford Division, it's probably in the range of 18 percent. Chevrolet is higher than that because we only go about 80 percent of what Chevy does. Lincoln Mercury is higher. So five points easily we traded off there. That's huge. Five points, when in your best years you were 5 to 6 percent return on sales. That's a big hit.

Other factors: If you took a look at the climb in health care, we anticipated some growth but not double-digit growth year over year over year. That implication to us is, in that four-year period, about $2.5 billion.

Currency: We sat there in 2001 saying, "Hey, you think the euro will get equal to the dollar?" We were sitting at 88 to 90 cents. We're sitting at $1.30 to $1.35 now. That's crazy. The pound is at $1.90 to $1.95. The (Swedish) krona is way the heck up there. We just never would have imaged that. The Canadian dollar has a huge impact. Going from 61 cents or 62 cents all the way up to 75 or 80 cents is huge. The cumulative effect (of currency exchange) is probably another $2.5 billion.

Nobody expected the commodity prices were going to go haywire on us. What would happen to you if we doubled your newsprint costs and told you over the next three years your net pricing was going to go down 5 to 8 percent? You'd have a little difficulty.

The other thing that set in is, as we rolled out of last year, we didn't see a huge impact of fuel prices on some of our bigger products. We had a phenomenal December for the F series. As January and February came in, it became clear that we were seeing some implication from fuel prices. It affects the margins.

So we've got our challenges, and we're taking them on.

What are you seeing comparable car to comparable car on pricing, and what do you see on mix? GM's mix came down a lot.

Mix is a factor. We're trading SUVs down with CUVs and lower-margin vehicles, and Escape's going up. We're seeing the F series now recovering. We always said we'd have somewhat of a mix effect because we'd be richer in cars, and we are indeed richer in cars. Overall Ford Division car share is up 4 percent. Lincoln Mercury is up 2 percent. Retail cars - this is where we make money - is up 20 percent in Ford Division. We're seeing some offset in SUVs.

Will rising car sales make up for the Explorer and Expedition segments weakening?

This is kind of the way we see the industry changing. Traditional trucks, which is pickups and SUVs, are down quite a bit as a percentage share of the industry. Crossovers and small SUVs are up. Small cars and sports cars are up. We're affected. Our large SUVs are down. But we're pretty much offsetting that with crossovers, which is the Freestyle predominantly, and the Escape. We anticipated a movement that would put less emphasis on sport utility vehicles. We didn't expect it changing that fast because we didn't expect the fuel implications. But I'm feeling pretty good about the game plan because we're getting more production on the crossover vehicles, and we have more crossovers coming. We've got the new (2007) Aviator coming, and we've got the new (2007) Edge coming. So I feel pretty good about the way we're heading.

Is Edge the name you're going to go to market with on that vehicle?

Something like that. Don't quote me on that.

Are large pickups immune because they're used more for work or for the capability?

Pickups are kind of an anomaly. They're such a huge segment. It has a different personality.

You see small cars up a little bit. How do you plan to address the small-car segment? It's always been a tough one to make money on.

The first thing you do is knock it out with the Mustang. There's not a nickel of incentive on the darn thing. Conquest sales are huge. And surprise, surprise, the Mustang last month outsold the Chrysler 300 by a substantial amount.

We're consolidating our small cars into our Wayne (Mich.) plant, so all the Focus will be built there. That helps enable the move of our medium-sized cars. And, frankly, that's where we intend to get some incremental share. We haven't been in the medium segment for a while. The medium segment is the second largest in the marketplace. We have real room for it in our showroom because the Five Hundred is situated pretty well in the largest portion of that. Where we're heading will be very good with the (Ford) Fusion, the (Mercury) Milan and the (Lincoln) Zephyr.

When does the Fusion hit showrooms?

Probably September.

Job No. 1 is?

July. It's on track. It's a really good car. As we really upgraded our car capabilities with the Five Hundred, this is a similar type of significant upgrade.

Are you going to have clear pricing differences among the Ford Focus, Fusion, Five Hundred?

You've just got to. You can't have one sit on the other. Or the dealers will sell the deal of the month. In terms of feature, size and pricing, you've got to differentiate them.

Will there be any Taurus retail?

Taurus retail is negligible. We sold 20 percent more on the retail side with the Chicago products than we did on the Taurus side. That's exactly what we wanted to do.

To differentiate pricing on the cars that are stacked up there, what kind of discipline do you need on incentives?

We place close attention to incentives, but you can't stay out of the marketplace. So we say, "What can we, based on the strength of our product, avoid?" For the first quarter, this ($2,834 per vehicle) is what our total division was versus Chevrolet (at $3,772 per vehicle). This ($2,950) is what the F series was versus the Silverado (at $4,119). We do that very deliberately because of the strength of the product.

So how do we approach incentives? With an eyedropper. Where we need to hit 'em on the nose, we'll hit 'em on the nose. In SUVs, you've got to be competitive. On pickup trucks, where you've got a competitive advantage, you can have lower incentives. And, by the way, we don't have a nickel of customer cash on the Five Hundred, Montego or Freestyle.

How long can you sustain that?

Hopefully, for a long period of time. It isn't forever. But we're pleased with the progress so far.

Can you take it through the balance of this year?

We shall see. We want to get (monthly sales) in the range of 20,000 units. At 20,000 units, we're going to more than fill that plant. And we're right on the rate of climb. The products are starting to move on their own. Remember that our Ford dealers haven't sold cars in quite a while, and they've got to get used to it.

What's different about selling cars?

With any type of retail, you tend to push what moves. When you're used to being a truck franchise, you know how to move trucks and SUVs. Your salesmen get accustomed to it. We're encouraging them to get some expertise on the car side. We've got to train them to do that.

Are you doing anything with the dealer discount to make cars more attractive to the dealer?

You can do some of that. But you've got to be balanced. We're really trying to move from the deal to appeal. That's exactly what we're doing. This climb is, with zero customer cash right up through March, almost 18,000 units. So we're not that far from where we need to be.

As SUV sales decline and car sales go up, how do you overcome the hurdle of the margin?

You get your costs right. You have to work on every facet of the business.

What are the ripest areas of cost?

It's everywhere. We certainly have aggressive targets on the manufacturing side of our business. We're working hard with our suppliers to fully develop and deploy the team value management, TVM, which really focuses on value-stream identification, waste elimination and those types of things. You very deliberately go after eliminating waste by improving quality or improving throughput. You look at overhead, you look at investment. And, by the way, you never stop. Kaizen is applicable around the globe: Continuous improvement. The more you look, the more you see.

Can this industry, this company, ever get back to the level of profitability you saw in the mid-to-late 1990s when SUVs were booming?

In the last three years, we moved from a substantial loss to a profitable company. Everybody keeps talking about it like we're not profitable. Last year, we made a pretty sizable amount of money. This year we'll make slightly less, and our credit company will make that amount of money. What we've got to do is get the automotive side of the business contributing more strongly to the bottom line. We intend to do that by delivering great products that have high appeal and good quality and therefore can attract the right revenues and do it at a cost basis that's competitive so we can offer customers affordable product, great product and make a margin in the deal. That's certainly our intention as we go forward with these products.

To return to that level of profitability?

To return to a very significant level of profitability. I don't know if it'll beat 1999 or 2000. Beats the hell out of me. The world has changed in different ways.

But take a look at Ford of Europe, for example. Last year we made about a $1 billion turnaround at Ford of Europe. Take a look at first-quarter profits, and Ford of Europe is still looking pretty decent. We gained share, we introduced a lot of new products, we've introduced a lot of diesel engines. We've gone into new markets fairly strongly, like Turkey. Those types of things are the way you go through your business and make your improvements, and that's exactly the approach we're going to take.

In Eastern Europe, you have less of a footprint than many of your competitors. Is that a place where you're going to need to make some investments?

Well, we have a very good investment now with our Ford Otosan venture. The majority of our Transits come out of Turkey. We'll always look at alternatives. We've got a fairly strong manufacturing base in Western Europe. We've taken the necessary capacity actions for the time being. We're pretty much running today at 100 percent of our capacity over there. But if there are more growth opportunities, we'll take a look at them.

Is that something you're looking at: Poland, Hungary, Czech Republic?

We look at all of that all the time. We look at it for our own facilities, and we look at it for major components.

If you're going to be a bigger player in the markets, do you need to manufacture there?

As the markets grow in Eastern Europe, we'll have to have a stronger presence there. The company for a long time has had a strong commitment to build product where we sell. It's a little difficult to build product in high-cost Euro areas and ship it into lower-cost areas. So, yeah, we take a look at that.

Volvo is bursting at the seams. Volvo gained 10 percent in volume last year. We sold 456,000. We want to grow that further. We think the opportunity is there. We put a lot of new product in there.

Volvo has been a very good acquisition for us, and Ford has really benefited Volvo in a very big way. We've given them the engineering and the architectures to grow their business. The S40, V50 all came out of Ford architectures.

Land Rover is now probably about 75 percent complete with their product lineup. The new Range Rover has been a very big hit. We're freshening it again this year. We're putting a supercharger in it. We're moving to Jaguar engines. We've got the LR3/Discovery. Great products, and they're moving very well in the assembly plant. We've got now the Range Rover Sport for a different image in the marketplace. We've got a little more work to do to get at the Freelander. So Land Rover is really going to come of its own. We've got plans to put that manufacturing footprint into a reasonable shape.

Jaguar: We took the step with Coventry. We've got more product coming. And we'll see how the reception goes, and we'll do what's necessary to get the footprint right for the size of the business. It's pretty clear Jaguar is not going to be a 200,000-unit franchise. Remember 1992? We made 20,000 Jaguars, and sold 22,000. And within about five or six years, we got to 50,000. And then, all of sudden, overnight, we're going to go to 200,000? It didn't work so well.

What we want to do is be true to what makes Jaguar different and distinctive. That is beautiful, fast cars, and (being) more a niche player. You saw the Lightweight Sports Coupe (concept vehicle), hint, hint. And it's going to be a great car. And we've got others coming along. Then we'll size the organization in the right way to make sure it can be sustainable.

Will you be in the segment where the X-Type is long term?

We haven't taken that final decision. Now the X-Type is starting to gain some traction. Figure this out - we didn't even have a diesel in Europe. We added the diesel last year, and it gained 20 percent in sales volume. Surprise, surprise. In Europe, you need diesels. We tried to push it too hard here, with a low-end product with a smaller engine. We're pulling back from that. We don't want to be the premium discount leader anymore. What we want is a product that's desirable. So we're selling more of the upseries or the V-6.

For Ford of Europe, is the lack of diesel particulate filters a challenge?

It's a challenge for everybody now. Nobody's got a lock on it. The suppliers are working hard to get more. There's only about three of them around the globe. Certainly we've been in very proactive discussions with them daily. And it is an issue over there. But it's not unique to Ford. We've been a little bit pinched, particularly in the first quarter of this year and a little bit in the second quarter. We expect some relief on that going into the summertime.

You'll get more?

Our intention is. We have contracts. We have agreements. Particulate filters now have become a government-incentivized proposition. It makes them particularly attractive.

Is there anything you can do to make more Escape Hybrids happen?

Supply base is an issue. We've been working with our suppliers on that. Certainly we're going to have to make more hybrids. We're going to have four more in the next couple of years. The first one comes this summer in the form of a Mariner. We want to do it on a rational basis. So far they've been a very big success for us in terms of the marketplace. We also know we need to take the cost base down because the cost is very substantial.

Does the price premium approach the cost premium?

Nowhere near.

How much do you need to bring it down by in order to equalize those?

A lot. More than a lot. Lots and lots.

So this is your charitable arm?

No. This is not charity. This is called investing in the future. This is called making sure that we're doing the types of engineering and development work and developing the supply base, so as things change, we'll be prepared for that. There's a lot of technology in the batteries. There's a huge amount of technology in the control system.

Why not raise the price another $2,000? You've got more buyers than you know what to do with.

That's a darn good idea. Dealers are doing that. Note to self: Good idea.

Is taking the price up a realistic option?

We haven't talked about that.

Is 20,000 still the highest volume you can do this year?

Yeah. We haven't changed that.

What can you do next year, when you have Mariner?

We're looking at staging overtime.

What kind of volume number can you get next year?

I frankly don't know. Stay tuned.

At Automotive News, one of our major scorecards is market share. How do we look at the historically low market share of Ford Motor Co. in America?

All of our new products hit where we said they would. They've gained share. The Mustang is (a hit). So everything we said would happen in the car side is happening. We never anticipated (an SUV decline) like this.

We're backing out of the rental fleet. We're down around 61,000 units through '04. That was logical because we want to protect our residual values. Well, surprise, surprise. Five Hundred and Freestyle (residuals are good).

Our strategy is to grow retail business. We haven't had as much success yet as we need in that regard. As we look at the F series coming back, combined with the fact that Ford is going into the mid-sized segment with the Fusion and the Milan, we should see some pretty good activity there. The wild card is, where will SUVs bottom out? We all don't know that right now.

You don't think it's at the bottom yet?

I didn't say that.

You just don't know?

Will it stay? Let's be honest. If you went back in the '70s and took a look at the oil shock of '73, the thing you wanted to do was be in very small cars. Then in '77, the Ayatollah hit, and we all got whacked on that baby, and big cars weren't the thing. But, all of a sudden, we went into the '80s, and big cars came back. You never say never in this business. How do you figure these things? I don't know.

Let's be specific. This drop-off in the medium and large SUVs, is it to at least some extent caused by fuel prices?

It's twofold. No. 1, we are seeing some consumer preference shifts from larger SUVs to smaller and crossovers. We saw that before the fuel prices ran up. We saw that because the Escape was doing well. On top of that now, you have the fuel-price shift. And I think that means because they have alternatives, that's OK.

On the other hand, you can make an argument that says, "Well, look at pickup trucks. Fuel prices aren't affecting pickup trucks." They're not affecting pickup trucks because maybe the consumer of those particular products doesn't see as readily the type of alternative for them. But, over time, fuel prices are bound to affect (vehicle choices). It affects the way you look at it, when you go in to the gas station.

I filled up a Mazda3 for $28 the other day, and I went, "Yeah, that gets my attention."

Yeah. So this is just common sense in the marketplace in my view. We have to anticipate it. You know what makes me feel good? We anticipated that. Look at the Five Hundred. It's got a package on the inside that's bigger than most big cars of the past. It's got more trunk room. It doesn't have a big V-8. It's got a fuel-efficient V-6. It's got a six-speed transmission or a CVT. It gives you all the package you want, and it's got the fuel economy.

We're going to give you the V-8, more power and more fuel economy on the 2006 Explorer because that's what the customer needs.

Is aging product also part of the SUV decline?

It's anybody's supposition, but it didn't affect it much a year ago. The Explorer and its competitors are fairly modern products. You don't have to apologize for them. I think it's a segment shift that we're seeing. And, on top of that, the fuel prices are having an implication.

Your dealers are not having the profitability they'd like. Is there anything you can do for them?

We're working with them. March was a more profitable month than February. Steve Lyons, our new group V.P. (for North American marketing, sales and service), made it really clear that we have two priorities with the dealers. One, we need to sell more, and that's a collective effort. Two, we've got to make them profitable. And by doing that, we'll get more profitable. We want to do that in an intelligent fashion. Our part of that is getting them the right products and making sure they're prepared to sell the products. And we're geared up to do that.

If you take a look three years ago, when we set up the revitalization plan, our dealers didn't see a hell of a lot of product. They see the product now, and they're living with a great F-150, a great Super Duty, the Five Hundred is moving, the Mustang they just can't keep on the ground, Escape Hybrid and things like that.

But even with those products, dealer profitability still is going down this year?

It's a challenge. If we look at these trends on money against the market, dealers have to throw in some on top of that, gang. What does it take? They're the art of the deal. They know how to do that. That affects them in the same way. So profitability is an issue. One of the things we look at very carefully is, what is their attitude? This is the NADA survey. We're making progress there (from the Firestone days). There are three things they look at there: Profitability, their confidence in the value of the franchise and their confidence in the product lineup.

Dealers have been lobbying for a special second-quarter sales incentive to get them over the hump of the revised Blue Oval program, given that profitability is dropping. Is there anything you can do for them on a second-quarter special bonus?

We have a new (Blue Oval) incentive program. It's out there. It's dependent on their performance in terms of increasing sales. And when they do that, they get rewarded.

But nothing on top of that?

No, we don't have anything on top of that.

What happened with Earl Hesterberg?

I think Earl got an offer he couldn't refuse. (Hesterberg resigned as Ford group vice president for marketing, sales and service to become CEO of the Group 1 Automotive dealership chain in Houston.)

He was recruited?

Absolutely. Earl's been recruited continuously. Earl's a very good guy. He did a great job for Ford in Europe. We were very sorry to see Earl go.

How surprised were you?

Very. But I talked to Earl. And he said, look, he's in his peak earning years. He's a young guy, and he's being given the chance to be a CEO in an arena he loves. He's got like 90 to 95 different dealers he's going to be overseeing. This is a job that he's been preparing for his whole life. So Earl's left. He's one of our biggest customers in his newest job. We wish him success, particularly in our franchises. We've moved on, and Steve is a strong guy, and he's going to do a great job.

Why is the new team right now, but they weren't the right team six months ago when you moved Earl over from Europe?

It isn't a matter of not being right. It's a matter of who do you think is preferred. It's not like you've got a bunch of losers, and you pick this guy. We though this guy was the right person at the right time. A lot of the dilemma we had here was the dealers thought we were in competition with them. We brought in a bunch of people from the outside to run some of the divisions who didn't know much about the auto industry. And the dealers weren't comfortable with them. The dealers knew Earl Hesterberg. People know and love Steve Lyons, Darryl Hazel (new Ford Division president), Al Giombetti (new Lincoln Mercury Division president). These are all people they're comfortable with. They know and respect A.J. Wagner (Ford Motor Credit Co. president of North America) and Greg Smith (president of the Americas). Believe me, I spend a lot of time with dealers because they're very important to us.

Is Visteon going to keep coming back to its parent and saying we need help? As a business, they look very much mired.

We certainly are working closely with Visteon to do the right thing for them. They're a big part of our supply base, and we need them to be stronger. And we understand that, and we'll work with our separate team dealing with that. I don't deal with it on a day-to-day basis, but there's a lot of things going on there.

You talked about the headwinds you've faced since you put out your revitalization plan. How do you adjust the plan to accommodate those?

The plan said we're going to rebuild the product pipeline. You take a look at the product pipeline we have today and what you're seeing coming, and, hey, we've pretty much filled the product pipeline. I'm not just talking about Ford. We've got Mercury back on track, and we've got a game plan for Lincoln. We've got Volvo on track. We've got Land Rover on track. And we're doing the right things for Jaguar.

We said we were going to improve quality, and we improved quality. We've got more to do.

We said we were going to take capacity out. We're going to right-size our business. We did that. And we'll take necessary actions when we need to when we go into the future.

We said we were going to take costs out. And we took $4 billion out. And we will continue to take cost out as we go forward.

We said we were going to get out of peripheral businesses and focus on the core. We have dumped $1.6 billion worth of these businesses. We got out of competing with our dealers.

And we said we'd fix the credit business. The credit business was in desperate shape about three-and-a-half years ago. And it's fixed.

So what we said we were going to do, we did. Unfortunately, some things changed. And we're taking the same basic plan, and we're modifying it accordingly. The principles won't change that much, though. We're going to continue to press for great products. We're going to continue to press on more efficiency in the operation, flexible manufacturing, improving quality and all those things. We're staying the course with modest adjustment.

It seems that the footprint, that capacity, is probably one of the biggest areas you need to take a look at in North America. Is that fair to say?

It's probably one of the areas that we've made some of the most dramatic change, not only in North America but Europe. Four years ago, we had a big place called Dagenham. It's no longer there. We've downsized Genk.

On the other hand, in markets where we could grow, take a look at what we've done in South America. The Camacari (Brazil) plant right now is bursting at the seams. We are sold out of that product (EcoSport). We are exporting about $1 billion a year out of that plant.

In China, we said we're going to invest $1 billion. We declared that we'd take the Chongqing plant and quadruple the size. We announced we were going to put a plant in place in Nanjing. We announced just last week we're going to put an engine plant there, primarily oriented toward that marketplace. And we have another plant with a partner for Transits.

So we're building the business where it makes sense, and that's called changing the footprint. And we'll do what's appropriate in the other markets to make sure that we match capacity with sales.

What is your capacity utilization in North America right now?

Not enough.

If Europe is 100 percent, what's North America?

It varies highly by product line. Probably somewhere in the mid-70s. Not what it needs to be. Some plants (are better). Kentucky truck? 110 percent. AAI? 125 percent. Wixom? Less than 50 percent.

Is it inevitable that you need to reduce plants here in North America?

Nothing is inevitable.

How do you deal with that 75 percent capacity utilization, then?

You work on making sure your new products are big successes so you can sell out the capacity. So the F-150 is now running in three plants, sizable plants with flexible manufacturing. AAI's the same. Chicago is the same. Flexible, pretty much running at full tilt. That's what you do. You don't do anything overt or overnight. You try to do it in sequence with your cycle plan, with your product plan.

So you really think you can fill that capacity back up again by growing sales and growing share?

I didn't say that. We'll take it on when we have to take it on. We're not prepared to declare what we're going to do today in that regard.

I want to give you something about Michigan. In the past four years, we've invested $9 billion in Michigan. You just go take a look at the Rouge, the Dearborn engine and fuel tank plant with the new I-4 engine. Take a look at Romeo with V-8s. Take a look at Van Dyke with transmissions. Take a look at Livonia with new six-speeds going in there. We spent $9 billion. We roughly spend about $4 billion a year in research and product development just in Michigan. So over the four-year period, we've spent $25 billion in Michigan. We employ roughly 55,000 people in Michigan, and we've retained that. We've pretty much protected the footprint in Michigan. I think we've done a pretty good job of that.

Now, Wixom has not made out. I won't pretend that they have. But, by the way, all the guys out of Wixom, you'll find them at the Dearborn truck plant, you'll find them at AAI and other plants. You'll find a lot of Visteon guys down at Dearborn truck. Why? Because that's what we try and do. We try to balance the overall employment levels and our commitments to our people.

And if you have to go the next step at Wixom, you'll find a place for those other people?

Our intention is to take care of our people. That's always a prime consideration as we go forward.

As part of the cost-cutting, where do parts from China fit in?

Where they make sense. And where they can be competitive fully loaded.

What kind of parts?

Easy shippers. You'd never ship sheet metal from there. Castings, because they have a high labor content. And they happen to be very good at precision casting. We don't have a game plan that says everything is going to China. On the other hand, we need to make all of our components competitive in the marketplace. So we work with the suppliers. We're not out there saying, "Match the price in India, match the price in China." What we're saying is here's the best we can identify globally, and let's get a game plan together to work with you to improve that, to close the gap by identifying waste through TVM.

The bulk of the work that we're doing in China is to satisfy the marketplace in China.

Would you consider importing vehicles from China back over here to the U.S.?

We have no plans to do that at this point.

This month you were quoted saying it won't be a free-for-all in the U.S. for China imports forever, that there will be eventual government regulations controlling that.

All I suggested was that sooner or later somebody is going to look around and say, "What are we doing here?" We all can't work at fast-food stands and shine each others shoes. So, somehow or another, we've got to look at the value added in the economy, and figure out where that is.

Is Ford lobbying Washington on those kinds of regulations?

No. We are not a protectionist company.

Do you right now have an overriding component cost-down program? Or is everything case-by-case?

Every component is dealt with individually. We have specific teams lined up with that, and we're working hand in glove with our suppliers. One advantage of TVM is that it is a fact-based approach, where we identify the costs at every stage throughout the value stream and try to identify the waste in the value stream, including our process in our plants. That really helps because it takes the bull---- out of the game.

If you say it costs that much, let's take a look at why. And if, indeed, it costs that much because the raw material is this or because you've got to process it, fine. Then that's something you're fixed with.

But when we take a look at value add in a very systematic way, we find that there's more waste than you might imagine. In an assembly plant, if you really look at what is value add, it's 3 percent or less. So what can you do to stage the material, to avoid replicated handling of the material? How can you do that in a streamlined fashion that eliminates waste? That's what we're looking to do.

There are a lot of things that come up in that process. That's the way to take the waste out of the system and retain the value. And that allows the suppliers to keep the profitability in their business. And then they can take those techniques and deploy them on other lines, and they'll make money on those lines, too.

Some of your larger suppliers are in great distress. Wouldn't you and the whole industry be better off if some of these companies just went out of business and there would be less capacity out there?

We don't try to play God. We leave that to you guys. Even the pope now has concluded that God rules and he'll follow. I wouldn't be smart enough or wise enough to make any declarations in that regard. But I do think the challenge on being competitive is facing all of us in a very different way. A lot of the factors I talked to you about are impacting our suppliers in a large way, too.

The dilemma I see is that there's no relief in terms of the pricing-value equation. For every dollar we go up in terms of pricing, it seems like we pay $1.50 back in incentives. So there's no way to get the relief out of anything. And that becomes a major dilemma.

If you can't hit your $7 billion profit goal in 2006, then when?

We haven't pegged our goals for further out. We will talk about those as we go forward. We intend to grow our profitability. We intend to do that on the automotive side of the business.

Is it just that you don't have a good handle on when yet? Or you don't want to talk about it yet?

We've given you a forecast for the year. And that's better than some of the other people are doing. You guys sort it out. It's a challenging business.